Government Buying Bad Mortgages

Unlimited home ownership seems a politician's dream.

We're paying the consequences of this pipedream.

Holden Lewis examines the housing plans of Barack Obama and John McCain:

McCain says that, in cases where homeowners were responsible enough to make down payments, the government should eat the loss. The Treasury would pay full price to the investors who own the loans. Under this plan, the homeowner would refinance for a reduced loan amount. The government would accept a loan payoff for that reduced amount, so the government would take the loss. The plan could aid up to 11 million homeowners, McCain says.

McCain compared his proposal to the federal government's Home Owners Loan Corp., which was founded in 1933, at the dawn of Franklin Roosevelt's administration. In those days, most mortgages were interest-only balloon loans that came due after three to five years. Borrowers expected to refinance their loans before they expired.

Congress addressed the problem in 1933 by forming the HOLC. According to the book "History and Policies of the Home Owners' Loan Corporation," by Lowell C. Harriss, the federal government eventually bought one-fifth of the nation's mortgages. About half of the HOLC's borrowers ended up in foreclosure. Still, the program is considered a success. The HOLC came to an end in 1951, at a slight profit to the government.

Obama says he favors a structure like the new Hope for Homeowners program, in which lenders take the loss. Hope for Homeowners is for delinquent borrowers who owe more than their houses are worth. Under the program, these homeowners get government-insured loans for 90 percent of the home's diminished value. The original lender loses the difference between the amount of the original loan and the amount of the new loan. The program is optional, and presumably lenders will reject deals in which foreclosure would be less of a money-loser.